A reduction in GST rate on steel scrap from 18 percent to 5 percent will substantially reduce the cash flow burden from the supply chain and discourage the generation of fake input invoicing.
India is on track to become the second-largest producer of steel in the world. The National Steel Policy, 2017 (NSP-2017) aims to increase crude steel capacity to 300 MT by 2030-31, with the secondary steel sector expected to contribute 35-40 percent of total production. The ferrous scrap market, currently worth Rs 10,000 crore, is set to soar to Rs 35,000 crore by 2030 as the industry shifts towards scrap-based steel production. However, the industry is facing a peculiar situation under the goods and services tax (GST) regime as steel scrap is taxed at 18 percent GST. The peculiarity lies in the complex supply chain of procuring steel scrap, an important raw material for the industry, from different dealers, both registered and unregistered ones.
There are two types of steel scrap – ‘old scrap’ generated from white goods and automobiles discarded by households or industry and ‘new scrap’ generated from manufacturing processes. The old scrap of households is generally bought by smaller unregistered dealers, who in turn sell it to larger registered dealers, without levying any GST. On the other hand, the new scrap, generated during the manufacturing process is bought both by unregistered dealers or by registered dealers from the manufacturing units. Now, the registered dealers must charge 18 percent GST when they further sell to the steel-producing industry and pay the same to the government.
Where the new scrap is supplied by a registered person to a registered dealer, who further sells it to the registered steel manufacturer, all parties charge GST at each stage and there is a free flow of input credit in the entire chain. The problem arises when scrap is purchased from unregistered dealers, as in absence of sufficient input credit (on scrap purchased from unregistered dealers), registered dealers have to pay GST in cash on their outward supply.